Negative Impact Of Microfinance In Developing Countries

The provision of Microfinance to the poor, women and others in their required areas is an essential and determined step towards poverty reduction by lending a helping hand to them. In the matters of household expenditure. This article will help the readers understand that learning about microfinance at the global level is difficult for anyone, one can get through it by studying and comparing various research and studies conducted by many communities, economists and institutions. Microfinance although a great concept, but lacks behind in some areas.


Microfinance is a kind of services which helps financially to individuals and small businesses who are not able to reach the bank and get access to loans and other services. It includes services like microcredit, microinsurance, and many other services. Its main target is to reach out to the poor of the country. 

Initially, the concept of microfinance was narrow. It just only meant provision to the poor or small businessman who lacks, money for their start-up. The main reason that banks do not provide loans to these entrepreneurs is that they do not have anything for the security deposit to give to the bank. Over time, the concept has taken a wider sense has emerged as a medium to help people especially poor, socially- marginalised, so that can get a better life by increasing their savings, credit.

Objective of micro-credit

In the year 1999, Ledgerwood found objectives decided by the Micro financial institutions of developing countries:

  1. Education of children up to age 14
  2. Eradication of poverty
  3. The decrement in the rate of infant mortality
  4. Employment creation plans
  5. Initiatives of new business
  6. Promotion of women empowerment and many more.

The principal objective is achieved through micro-savings, micro-insurance and helping the poor.

Impact on poor and women

The concept of the impact of microfinance is of many dilemmas. Supporters of it say that it reduces poverty because it creates a large number of employment which results in a high rate of income. It enables every poor person to get themselves in self-employment works, thus helping them to increase their standard of living. It has improved nutrition and educational processes.

Md. Yunus, a Bangladeshi social activist who founded Grameen Bank, in his Asian Development Bank evaluation found out about the women entrepreneurs’ economic development. He found out that projects established for women had positive effects on their economic empowerment. Most of the research studies have shown that it empowers women mentally and financially.[1]

Although it is difficult to get through the impact of it on a global level, we can test this through various research and studies conducted. A study from the World Bank, in the villages of Bangladesh, shows the impact of Micro-credits on them. This study of around 20 years concluded that this concept of microfinance increases the income of micro businessmen and also increases their standard of living, jobs, education available to them, repayment of debts and many more advantages. Many other contributions to the receiver’s development like improving conditions of his and his family; the education as discussed, development in the access to healthcare. The most important advantage is the empowerment of women who are self-employed and run small scale industries. 

Condition in Developing Countries

The article has viewed some aspects of microfinance in developing countries, explaining ways how it has reached out in helping the poor, on the other hand, other traditional banks cannot. There are many ways by which they do so: by group lending, short repayments, small loans etc. The ending process also lies on some personal interaction basis between the borrower and lender. It is mostly based on the borrower’s business and not on guarantees or amount or credit score. 

Microfinance is not for everyone, skills and ability are required to take the debt and carry on the business. A recent study in New York shows that Household can be better run with access to credit as compared to families without credit. Indonesia had a rise in 12.9% increase, Sri Lanka had a 15.6 % rise, Bangladesh had 29.3% of the rise in income in families with access to credit.

In Nepal, a study by the United Nations International Children’s Emergency Fund (UNICEF), has shown that poor are disciplined borrowers and savers. They can repay the loan amount on time. As a result of it, the country has a lower infant mortality rate, more girls can go to schools, high nutrition availability, and access to the education system has taken a great step ahead.[2]

Why do we need it?

  1. There is so much market share, large institutional size thus affecting poor’s ability to and the bank’s inability to lend them.
  2. In developing countries, traditional banks are so underutilised that they are not forced into micro-financing.
  3. National government monetary policy and other taxation policy can change the way of money from credits into other investments. This has come out to be a huge problem in developing countries. Government levies taxes on banks which makes lending profitable to them and puts the money in other investments. 
  4. Even if lending banks want to lend and help the poor, the regulatory system of the Government in certain situations will not allow the bank to do so.
  5. In developing countries, interference of politics in everything is a must and it worsens the situation. They come into power and let the funds go into rich pockets, other politicians. Thus, making rich, richer and poor, poorer.


Information asymmetries kind of situation arises since borrowers know about their credit amount and risks involved with the bank they are lending from.

  1. In place of the poor getting the benefit of Microfinance, rich clients get access to these institutions at a much lower rate of interest. Its main target is to help the poorest of the poor, to eradicate poverty. But these institutions prove to get poor into more trouble and worsen their conditions. 
  2. It is observed that poor use these microcredits to pay their debts and not use it for their business or raise their standard of living. This happens because the borrowers are self- employed and work in a sector which gives them small income, which makes repayment of debts impossible or very hard. This has led poor into a trap and often end up in committing suicide.
  3. Rogaly in the year 1996, declares some mismanagement and wrong targets about microfinance: 
    1. Microfinance doesn’t reach the poorest.
    2. Over simple way is used to get rid 
    3. There is a lack of education and awareness.
    4. A single sector used to give access to the resources and fight against poverty.
  4. Microfinance companies who generally focus on saving rather than credit end up helping only small proportions of poor. 
  5. The main problems lie that 90% of the developing countries population cannot get access to the micro-financial institutions like Grameen Bank. The banks are not able to make that kind of model which is affordable and will be able to reach out to all.
  6. According to a report,[3], the current issues are that the Government supports these institutions but are not able to implement it at a large scale. Sometimes, the poor get highly subsidized credit from banks. 


The concept and the idea of microfinance have achieved much less than what its supporters tended it would be. The main reason for this is that the negative aspect has been drastic. Microfinance helps the poor in both economical and a social way and this can only be achieved through the stability of these banks and companies. It is that instrument that fits the necessity of a large population. If best used, targeting the poorest first, there will be development seen at a much higher rate.

Frequently Asked Question

  1. What is microfinance?

Microfinance is a kind of services which helps financially to individuals and small businesses who are not able to reach the bank and get access to loans and other services. It includes services like microcredit, microinsurance, and many other services. Its main target is to reach out to the poor population of the country. 

  1. To which section of society does it mainly target?

The provision mainly targets upliftment of poor and women. And also, people who need to start a small scale business.

  1. How it helps poor and women?

It helps the poor by providing loans at a much lower rate than traditional banks. It has helped women by monetary support and empowering them and their households.

  1. Which country is under-developed?

According to the world bank index, the country Venezuela.

  1. Name some micro-financial banks?

Some of the micro-financial banks in India are- Annapurna bank, Ashirvad Financial Pvt, Disha Microfinance Pvt Ltd, Bandhan Financial Services Pvt Ltd and many more.


  • [1] Yunus, Muhammad. November 1999. The Grameen Bank. Scientific American. 281(5) p. 114- 119.
  • [2] UNICEF. 1997. Give Us Credit. Division of Evaluation, Policy and Planning.
  • [3] Buss, Terry. 1999. Microenterprise in International Perspective: An Overview of the Issues. Journal of Economic Development.

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